Sweden-based Klarna has racked up solid success in Europe over the past several years with its buy-now, pay-later online retail services, but to crack the U.S. market it's going back to the laboratory.
Web merchants in the U.S. show interest in adding instant-credit services like the type Klarna specializes in — but they have other priorities right now, said Brian Billingsley, CEO of Klarna North America. Concerns such as "cart abandonment"—the interruption of an online purchase at the checkout—and the rise of card-not-present fraud also are dominating retailers' thoughts, Billingsley said.
Complicating matters is the rise of mobile devices, which introduced a significant new "distraction factor" to online shopping that's causing chaos at the checkout point, he said.
"More people are shopping when they're out and about, and when they hit the checkout page, if it's complicated, they're increasingly likely to just abandon the whole purchase," Billingsley contended. To properly serve the market, Klarna must address each of these pain points as part of the design of its instant-credit offering.
To fine-tune its approach, Klarna is conducting research into both the glaring and microscopic details that influence consumers' online purchasing experiences.
At its U.S. operations base in Columbus, Ohio, Klarna has assembled a team of researchers who deeply study the individual "mouse moves" and clicks of consumers navigating e-commerce websites and apps, Billingsley said.
"We have a SWAT team of people working on this, focusing on every aspect of the checkout page, following the consumer flow—every time they hover, hesitate or click—to isolate and eliminate many problems causing cart abandonment," Billingsley said.
These insights are now part of the package Klarna offers merchants who use its credit, payment processing and fraud-protection services, he said.
Instead of taking a consumer's full payment details immediately, Klarna improves speed and convenience by requiring consumers to enter only their email and a delivery address—or sometimes just a ZIP code—to complete an e-commerce purchase. Items are shipped immediately, and billed within two weeks, so consumers pay at their convenience typically via a credit or debit card or by linking a bank account.
Klarna uses a complex process to run an instant credit check on customers and absorbs full liability for the sale on behalf of the merchant. It also handles billing and payment. The process is quick, but Klarna is working to speed it up even further with its partner Provenir, a platform-based risk-analytics and decisioning service.
Provenir instantly analyzes data Klarna provides from diverse sources, including email and shipping address validation, geolocation information, fraud-screening, credit bureau reports and comparisons with any previous transaction data, as needed, said Paul Thomas, managing director of Provenir's U.S. operations in Parsippany, N.J.
Within half of a second of receiving the necessary data from Klarna, Provenir produces a defined view of a customer's risk profile, Thomas said. But Provenir's goal is to soon get that down to 200 milliseconds, he added.
The need for speed cannot be underestimated. "Even the appearance of an hourglass or a little timer for a split second on a website's checkout screen can drive abandonment of a purchase," Thomas said.
Overstock.com Inc. and Shoes.com are two major e-commerce merchants that have adopted Klarna's services in recent months since the company went live in the U.S. last year. Dozens of smaller merchants in the U.S. also use Klarna’s services, the company said.
Merchants offering Klarna's checkout services pay a fee of about 2.9% of the transaction, plus around 30 cents. Klarna plans to roll out "new revolving credit and promotional plans" in the U.S. later this year, Billingsley said.
In Europe, more than 60,000 e-commerce merchants have adopted the service since Klarna was founded in 2005. In Sweden, Klarna is involved in half of all online retail transactions Billingsley said. Europeans show a high propensity for the pay-later model and he believes U.S. consumers are ripe to use this approach, he added.
PayPal also has its eye on this market, and recently signaled plans to rev up its own instant-credit services for online purchases via PayPal Credit, a product previously called Bill Me Later.
Klarna's service could be an advantage to certain U.S. merchants in competitive e-commerce niches, said Thad Peterson, a senior analyst with Aite Group. "The idea of freeing the merchant from coping directly with fraud, along with the reduction in purchase friction could be a powerful combination as more and more commerce moves to mobile," he said.
Jose Diaz, director of payment strategy for Thales e-Security, which advises a broad cross-section of companies on payments fraud, noted that merchants have plenty of options from separate providers for security and streamlining the checkout. Visa, MasterCard, American Express and PayPal, for example, each support simplified e-commerce checkout options and "buy buttons" that are spreading within websites, mobile apps, email and social media.
"Klarna seems to bring multiple options to the online purchasing experience—a third-party financing arm, a way to combat fraud and a streamlined checkout experience, and I don't know which one is more attractive to [merchant] customers," Diaz said, noting it's too early to speculate about its long-term success in the U.S.